When any government finances income tax rate cuts with new revenues from energy taxes (carbon and/or value-added), that government has shifted tax burden from wealthier households to poorer households, from resource extracting corporate entities to value-adding entities and from the private sector to the public sector.

The relationship between the income to energy consumption tax shift and increased income inequality is well- documented in British, Swedish and German budget documents, as well as the actions these governments have taken to try to mitigate this perverse outcome.

Government agencies, crown corporations and not-for-profits do not pay income taxes. But they do pay carbon taxes and HST. So every nation that has elected to finance cuts in income tax rates (or hold off required increases) by introducing/increasing energy consumption taxes has shifted tax burden from the private sector to the public sector. Of course, this means required increases in payroll taxes, health care premiums, tuition rates, mandatory social security contributions and/or public service cuts, or all of the above. In other words, the income to energy tax shift is unsustainable.

Unfortunately, however, each of these governments reports that they have failed, to date, to curb the trend to increasing income inequality.

I found the picture quite clear when I started reading the annual UK Treasury report entitled “The Effects of Taxation and Benefits on Household Income” (1999 through 2009) at: http://www.statistics.gov.uk/STATBASE/Product.asp?vlnk=10336.

Each annual report includes a graph showing the direct and indirect taxes paid, by household income quintile, where “indirect taxes” are consumption taxes including VAT and carbon taxes. The same graph also shows cash and in-kind transfers to households, also by income quintile.

Table 3 in the dataset downloadable from the above URL shows that VAT eats up 10.8% of the disposable income of the poorest UK families, while it takes only 5.8% of the disposable income of the wealthiest 20%. Taxes on carbon-based fuels and vehicle purchases take 3.2% of poorest household incomes and only 1.6% of wealthy family incomes. In other words, these tax measures are highly regressive, and financing income tax rate cuts with new value-added and energy consumption taxes indisputably shifted tax burden from the rich to the poor in the UK–even after we take into account tax rebates, heating fuel rebates and income support payments to the poor.

Every year, the graph shows that 60% of UK families: (1) pay more in consumption taxes than they pay in income taxes, but (2) need to receive more in annual cash transfers to survive than they pay in consumption taxes.

Notwithstanding the assertion by economic theorists who suggest that a system that taxes and then rebates substantial amounts of cash to the same families in the same year, this is an highly inefficient procedure.

The combined costs of administering tax collection, family income support and tax rebate programmes eats up some 12% to 30% (depending on the nation) of revenues collected from families in the 3 lowest quintiles. Highly inefficient.

And given that income inequality has generally worsened–not improved–since most of these nations have implemented their income to consumption tax shift, the strategy has also proved to be ineffective.